Why are gasoline prices high?

April 1, 200510:57 AM CDT

As gas prices in the U.S. shoot up to record levels, the official explanation is that there is a supply and demand imbalance. Limits on production by oil-producing countries and growing petroleum usage by developing nations such as China are said to be responsible for skyrocketing gas prices for U.S. consumers. This storyline, however, hides more than it explains.

The major components of fuel prices are the cost of extracting and transporting crude oil, the expense of refining it into gasoline, heating oil and other products, and profit. About one-third of the crude oil consumed in the U.S. is produced domestically, and production costs have not risen dramatically. However, while in much of the country electricity rates are set by state regulators based on actual costs of production, for oil products there is no such governmental regulation to protect consumers. Consequently, profit-maximizing oil corporations are free to charge “whatever the market will bear,” despite the impact on the working-class public and the economy as a whole.

The absence of regulatory oversight of the oil industry is felt even more acutely in the refining sector. Despite aging facilities and increasing demand, little new refining capacity has been built by the handful of companies that control this crucial sector of the economy. The result is average gas prices that have soared past $2.10 a gallon nationwide, and over $2.30 in California, where required special gas formulations to combat air pollution give the refining monopoly a particular advantage.

Despite this crisis, there are no announced plans by any publicly traded company to build any new refineries in the U.S. The reason is not hard to find. According to a recent Bloomberg News report, “Refining profits surged 93 percent to $28.6 billion for [Exxon and its six biggest competitors] last year, compared with a 25 percent increase in profit from oil and natural gas sales.”

What can be done to provide relief to consumers? In the 2003 California gubernatorial recall election, Lt. Gov. Cruz Bustamonte proposed regulating the state’s oil refining industry to limit profiteering by the oil monopolies, drawing a comparison with the artificial scarcity created by unregulated generating companies that caused the 2000-2001 electricity crisis. The proposal to link refinery prices to actual production costs was met with silence or ridicule by rival politicians and the commercial media. But had Bustamonte’s plan been implemented, new state-regulated refining capacity would have brought gas prices back down to earth, at least in California.